China’s E-Invoicing March and Why It Matters

Spend Matters welcomes this guest post form Adam Cleveland, vice president of demand generation at Tradeshift.

Often, government reforms force businesses to adjust their business processes for compliance reasons. China’s VAT reform not only impacted processes related to tax compliance, but it also opened up business process and supply chain redesign discussions to enable higher productivity, better security, enhanced transparency and managed risk. This article addresses the e-invoicing environment China inherited, what’s happened in China with respect to VAT reform and e-invoicing, and why it matters to businesses across the globe.

Background on E-invoices

Paperless invoicing has evolved significantly around the globe. Spawned from a desire to connect various vendors to a payables system, electronic data interchange (EDI) was the first digital initiative in an effort to go paperless, followed by a more flexible system based on electronic bill presentment and payment (EBPP). Because both EDI and EBPP were expensive to deploy and support, more sophisticated, inexpensive and flexible schemes evolved enabling e-signatures and a more consistent framework for issuing, signing and storing e-invoices.

Over time, these advanced e-invoicing schemes migrated to the cloud, where the speed of connections and seamless electronic file transfers made it easy to capture, validate and transmit invoice data. Smartphones, tablets, payment apps and big data analytics subsequently drove an ever-increasing demand for additional value-added features into e-invoicing to address fraud, errors and tax issues. For much of the world, the invoice was no longer a physical artifact or digital print but rather a full-blown online exchange and intelligence system whose tentacles reached all departments within a company and on which businesses worked more efficiently. It was into this mix that China stepped in 2016, initiating a rigorous overhaul of VAT and ushering in an entirely new way of conducting business.

The China Transition

Keen to spur a modernization of its economy, China outlined a series of key initiatives in its 13th Five-Year Plan in 2016. Notable among the initiatives was China’s Business Tax to VAT reform, which allowed for the issuance of e-invoices beginning in May 2016. The reform affected more than 10 million businesses, namely service-based entities in hospitality and restaurants, banking and insurance, real estate and construction, healthcare, education and consumer services.

With this reform, China took a major leap to improve its supply chain infrastructures and facilitate payments processes that had previously been nearly all paper-based. In addition, the company diversified its tax base from one highly dependent on its industrial businesses to one that was increasingly focused on service-based industries.

As a result of these reforms, China is poised to be more innovative, entrepreneurial and expansive in terms of business models. According to the World Bank, China's ranking in terms of the ease of doing business has moved up eight spots every year from 2013 to 2016, while the country's ranking for the ease of starting businesses climbed 31 places during that period.

In 2017, the country began to make e-invoicing compulsory in several core service-based industries. The State Administration of Taxation promulgated policies encouraging local tax administrations to push certain key industries such as e-commerce, telecommunications and public utilities to use VAT normal e-invoices more extensively, and it announced e-invoicing guidance and standards for these suppliers. In particular, the Beijing State Tax Bureau issued a policy that made VAT normal e-invoicing mandatory for the three big telecommunication companies in Beijing (China Mobile, China Telecom and China Unicom).

Potential Growth

Based on e-invoicing’s growth over the past two years, the future is indeed bright for innovative market forces in China. Several mobile payment behemoths have incorporated e-invoice issuance and archiving functionality to their services, aiming to enable improved payment management. In service sectors such as e-commerce, catering, transportation and logistics, businesses are now able to use a single platform for both the payment and e-invoice issuance. As China’s new VAT system settles into existence and use, it’s quite likely that e-invoicing and payments will increase exponentially, saving enormous resources along the way.

Blockchain’s Future in China

No discussion of e-invoicing would be complete without a tip of the hat and an eye to the future of blockchain. Consistent with its drive to modernize its technology infrastructure, China also included adoption and penetration of blockchain in its most recent five-year plan. Specifically, China is utilizing blockchain technology for social taxation, increased tax revenue and electronic invoicing. The reasons for China’s push of blockchain are myriad but essentially boil down to the follow three main drivers:

With the second largest economy in the world, China’s use of blockchain will likely put a huge dent in tax evasion within the country, leading to substantial increases in tax revenues to the government.

A more level playing field will exist when some of China’s largest e-commerce platforms are incorporated into China’s taxation system, again leading to an increase in tax revenues.

Given the May 2018 State Council of China order to local financial authorities and government-funded research centers to focus on the development of blockchain technology and accelerate the commercialization of the blockchain, its impact on the country is only expected to accelerate over the next several years.

Summary

Often, government reforms force businesses to adjust their business processes. China’s VAT reform not only impacts processes related to tax compliance but also opens up business processes and supply chain redesign discussions. This enables higher productivity, better security, enhanced transparency and managed risk.